Companies act 1956 SEBI FEMA Stock Exchange

Methods

Fixed Price

BookBuilding

Prior to 1995, the Indian capital market practiced fixed pricing methods. In case of new companies, their promoters were bound to hold 50% of the post-issue capital. The mechanism of price fixing was in the hands of Investment bankers .

Book-building is the process undertaken by which a demand for the securities, proposed to be issued by a body of corporates, is elicited and built-up.

Fixed-price Method

Book-building Method

Price at which the securities are offered/alloted is disclosed in advance to the investors.

Price at which securities will be offered /alloted is not conveyed in advance to the investors. Only an indicative price range called price band is informed.

Demand for the securities offered is Demand for the securities offered known only after the closure of the can be known everyday as the issue. book is built. Payment is made at the time of Payment is made in a different subscription wherein refund is given manner depending on nature of after allocation. investors who have participated in the bidding process.

Initially, the Book-building process was applicable for the mega issue (more than 100 cr), and it was mandatory for the company to raise 75% of the amount through the Book-building process only. In 1996, SEBI gave all the companies the option to raise money through the Book-building process. in 1997, SEBI also lifted the restriction of 75% and provided the option for 100% Book-building process.

In 2000, SEBI introduced a compendium, which included the model time frame of 5 to 10 days for Book-building. on March 29 2005, SEBI announced participation of small investors in the Book-building process was raised to 35% from the existing 25%. Also he bidding period was reduced from 5-10 days to 3-7 working days.

Red Herring prospectus Floor and Cap price Price Band Cut-off Price Green shoe Option

Nominate Book Runner Lead Manager

Appoints Syndicate Members

Submit Red Herring Prospectus to SEBI

Book open

Inputs the order of Bidder

Evaluation of Bids

Decide Cut-off price

Allocation of Securities

Listing of Securities & Trading commences on Exchange

The cut-off price is arrived at by the method of Dutch auction. In a Dutch auction the price of an item is lowered, until it gets its first bid and then the item is sold at that price. Let's say a company wants to issue one million shares. The floor price for one share of face value, Rs 10, is Rs 48 and the band is between Rs 48 and Rs 55.

Subscribed Shares(Bids Price Received)

100000 250000 300000 350000 500000

55 54 53 52 51

The final cut-off price is then decided at Rs. 52 as in this all 1 mn shares are sold. Investors who had applied for shares at Rs 55, Rs.54 & Rs 53 will also be issued shares at Rs 52. The extra money paid by these investors while applying will be returned to them.

Underwriting Distribution Advice and Counsel

Share price of a public company is exposed to the stock market fluctuations. The interests and expectations of the minority public investors must be taken into consideration. Wide-ranging disclosure requirements and financial reporting. Substantial investment in the IPO process. New responsibilities and restrictions for the management